Growth Funds: Advantages & Disadvantages for Investors

Investing in a growth fund can present you with some unique features as an investor. Some people can really benefit from this type of investment while others prefer to stay away from it. Here are a few of the pros and cons of investing in a growth fund.

Pros

The major advantage of this type of fund is that the fund manager is striving to achieve capital appreciation for the investors. Every decision that is made is based upon how it will grow the value of the portfolio. For investors that value capital appreciation above everything else, this really is a great investment for them.

Another advantage that this type of investment provides is diversification. If you are the type of investor the likes to invest in growth stocks, you would be taking on quite a bit of risk by doing it alone. If you use a growth fund instead, you will be diversifying your portfolio and lowering the overall risk. Most individual investors do not have the capital that it takes to produce a truly diversified stock portfolio. By pooling your money together with many other investors, you can successfully purchase many different growth stocks. This greatly improves the odds of your success as an investor.

The potential that comes with this type of investment is vastly superior to any other type of mutual fund. If the fund managers successfully chooses companies that are poised for growth, you could potentially bring in a substantial return on your investment. For those that like to have the possibility of bringing in big gains, this is going to be one of your best opportunities to do so.

Cons

One of the disadvantages of investing in a growth fund is that it is very volatile. When you invest in a portfolio of growth stocks, you will be experiencing a lot of up and down movement. One year you might be able to bring in a 20 percent return on investment. The following year, the fund might lose 8 percent. This means that you will have to have a high tolerance for risk and be able to put up with this type of uncertainty. This volatile nature of the investment is definitely not for everyone.

Another disadvantage of this type of investment is that it requires a long-term commitment. In order to truly benefit from a growth fund, you will need to devote several years to this investment. Many people say that you need to leave the money in the fund for least 5 to 10 years before cashing out. Otherwise, you might get in at the wrong time and take part in a major decline in fund value. If you try to time this investment, there is a good chance that you will not come out ahead.

Investing in a growth fund also will cost you some money in expense ratios. Most funds that have a high degree of active management will charge a little more in the expense ratio. This means that you will be eating up some of your profits in fees each year.